Market Crash: Why Oil Plunged 25% and How Investors Should React

A shake up from OPEC has caused oil prices to plummet, which threatens TSX stocks like Suncor Energy Inc. (TSX:SU)(NYSE:SU) in the near term.

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The price of WTI Crude was down 27% in the early morning hours on March 9, and Western Canadian Select (WCS) prices were down 15%. Global oil markets have been thrust into chaos due to a price war between Russia and Saudi Arabia.

Markets around the world were already battling with the threat of falling demand because of the COVID-19 outbreak, and there are fears that this development could rattle the world economy even further.

Asian markets were deep in the red at the time of this writing, while futures in European and United States markets were down sharply. Dow Jones Industrial Average futures were down over 1,200 points. The energy heavy TSX Index will undoubtedly take a big hit in response to this stunning development.

The situation right now

In previous articles, I’d discussed how the Organization of Petroleum Exporting Countries (OPEC) issued policy that would dramatically impact oil prices. Russia and Saudi Arabia have long been senior partners in OPEC, and the breakdown of this relationship will have far-reaching consequences.

Mikhail Leontiev, press secretary for Rosneft, Russia’s largest oil producer, said that the relationship with Saudi Arabia had become “meaningless.” The reduction in oil supply agreed to between the two nations has been swiftly replaced with U.S. shale oil.

Top U.S. oil producers were already struggling to generate profits, and this dramatic plunge will put greater strain on the industry. The Canadian oil sector will also brace for impact.

Alberta’s economy will be the hardest hit. In its most recent provincial budget, Alberta had forecast the price of oil at over $55 a barrel. WTI Crude had plunged below $30.

Oil stocks to watch today

Canada’s energy sector accounts for over 15% of the TSX Index. Investors should expect severe turbulence today.

Suncor Energy (TSX:SU)(NYSE:SU) is one of the top 15 stocks by market cap on the TSX. It’s joined on the top 20 by energy giants like Enbridge, TC Energy, and Canadian Natural Resources. Shares of Suncor have plunged 13.9% over the past month as of close on March 6. The stock is down 22% year over year.

Warren Buffett recently increased his exposure to Suncor. Suncor has shown that it’s resilient in the face of lower prices. It opposed Alberta’s move to cut production in late 2018. The company has said that it’s insulated from price discounts due to its refineries and pipeline contracts.

Shares of Suncor had an RSI of 18 as of close on March 6, putting it well into technically oversold territory. It also boasts a favourable price-to-earnings ratio of 18 and a price-to-book value of 1.2.

Suncor’s technicals will likely look better as investors should expect a significant retreat today. The company last announced an increase in its quarterly dividend to $0.45 per share, which represents a strong 5.5% yield.

Husky Energy suffered a 12.5% drop on March 6. Its sky-high dividend of 9.9% is already not well covered by earnings, so a prolonged slump for oil and gas prices could threaten its position for income investors. Husky reported a $3.2 billion loss in the fourth quarter of 2019. This one looks too dangerous to touch right now.

This is shaping up to be the most turbulent period for the sector since the 2014-2015 oil price shocks. Indeed, the drop for WTI Crude was the largest since 1991.

With the broader market already suffering from convulsions, investors have the luxury to be choosy. The energy sector is too risky for me to go bargain hunting right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

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